President Elect Trump – What it means for Australia and the World

The election of President Elect Trump is another BREXIT (Britain Existing from the European Union – like event, both representing a movement for change that is sweeping the world. Rasmussen Reports 2017, notes that 70% of Americans have believed for some time that their country has been heading in the wrong direction; exit polling suggesting that voters wanted change. No doubt this is one of the main reasons why the people of America have chosen to elect a businessman who has never held elected office as their ‘change candidate’. Whilst the result was unexpected to many, and several commentators predicted doomsday results, since the election both the Australian and US share and commodity markets have in fact rallied upon the news with the ASX up 3.7 percent since election day.

President Trump’s Economic Policies

The US economy is still in a difficult position after the GFC (Global Financial Crisis) with high national debt of approximately twenty trillion dollars and low economic growth; adjusted for inflation the average yearly GDP growth under Obama has been less than 1.5%. President Elect Trump believes that the way ‘to make America great again’ is to grow the economy. For that reason, he has proposed the following main economic policies:

Tax Reform – reducing the top tax bracket from 36% to 33%, cutting the corporate tax rate from 35% to 15% and introducing “massive tax cuts” for working and middle income Americans.

Regulatory Reform – President Elect Trump has called for the review and removal of unnecessary regulations to help reduce the compliance burden on businesses and stimulate growth.

Investment in Infrastructure – President Elect Trump plans to spend an estimated $1 trillion on energy and infrastructure.

Energy Independence – President Elect Trump plans to make American energy independent by fully utilising all domestic energy sources; a combination of fossil fuels and renewable energy.

Free Trade Agreements – One of President Elect Trump’s biggest pledges was to ‘negotiate new trade agreements and renegotiate exiting free trade agreements’. This includes, but not limited to, withdrawing from the Trans-Pacific Partnership (TPP) and renegotiating the North American Free Trade Agreement (NAFTA).

What Does President Trump mean for the World?

Possibly the biggest impact a Trump Administration could have is the way it treats the different hot spots around the world. President Elect Trump has been calling for a redefinition of NATO’s (North Atlantic Treaty Organisation) purpose and has described it as “obsolete and expensive”, referencing the fact that there has been no major review of the organisation to address the new and emerging threats of the modern world, specifically the rise or terrorist organisations such as ISIS (Islamic State in Iraq and Syria).

The US is involved in several conflicts around the world and how the new President deals with these could impact world economics, especially if they escalate. Defeating ISIS, the Syrian conflict, Israel and the South China Sea are areas that require the attention of the President and ideally peaceful resolution.

President Elect Trump has made a point of referencing President Putin throughout his campaign and has indicated that improving relations between the US and Russia is a priority for him. What this means is not yet clear as Trump has not clearly defined his foreign policy, but what it could mean is sanctions between the two countries are lifted in exchange for Russia’s cooperation in Syria.

What Does President Trump mean for Australia?

The main areas of interest for Australia under a President Trump Administration are:

ANZUS (Australian New Zealand United States) Alliance
Australia’s military alliance with the US is vital to our national security. The ANZUS Alliance has been a provider of stability in the Pacific region for many years and according to Prime Minister Malcolm Turnbull will continue for many more. “I have… absolutely no doubt the commitment of the United States to the alliance, the presence in the region, its commitment to its allies and our neighbours will continue” he said.

Commodity Prices and the Federal Budget
If $1 trillion is spent on infrastructure to rebuild America, this increase in expenditure should generate an increase in demand for commodities like iron ore and coal, both of which Australia produces. Whilst Australia does not directly supply America with these, as global demand grows the overall price will grow. According to the Australian government’s budget papers, the effect in 2017/18 of a change in iron ore price alone is massive; every US$10 a ton change in iron ore price impacts tax receipts by $3.9 billion. The ‘rebuilding’ of America could see a reinvigoration of our commodity markets and a significant improvement to the Australian Federal Budget.

Trade
President Elects Trump’s pledge to abandon the TPP, from an economic perspective, is potentially a negative for Australia as this agreement could have developed new markets for export for our producers of beef, dairy and wheat. However, these losses could be counteracted by gains in commodity prices like we are already seeing. President Elect Trump also indicated that he wants fairer trade agreements with specific nations rather than groups. This is an opportunity for Australia to develop specific trade deals with the US. “We will see opportunities to advance our interests and we will certainly do so,” said Foreign Minister Julie Bishop.

AUD/USD (Australian Dollar against the United States Dollar)
It is predicted that increased capital will flow into the US spurred on by a cut in company tax. This should bolster the US equity market and in turn, drive the US dollar higher. For Australia, this has the potential to put pressure on our commodity-sensitive dollar, but it is now expected the downside will be less than first predicted. It was previously predicted that the AUD would fall by 10 percent, it is now expected to ‘fall by roughly 5 percent because it is likely to receive support from higher commodity prices, an improvement in Australia’s terms of trade and a narrower current account deficit,’ Richard Grace, CBA’s chief currency strategist said.

President Elect Trump may not have been what the world expected but it is a revolution that holds great opportunity for America and the world. President Elect Trump’s focus on policies that will stimulate the American economy and create jobs; such as rebuilding infrastructure, renegotiating trade agreements and tax cuts, have the potential to do the same for other nations. In Australia, the increase in demand for commodities and the potential to renegotiate our trade agreements with the US should see a reciprocal improvement in our economy; signs of which we are already seeing with our share and commodity markets rallying after the news of Trump winning. The next four years are going to be interesting and time will tell what a President who owes no favors to any special interest groups will do. It is indeed an exciting time.

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Elliot Watson Financial Planning Pty Ltd and its advisers are Authorise Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429. The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.

The information (including taxation) in this website does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.